Thursday, October 02, 2008

Don't go blaming CRA requirements. . .come on!

During the current financial markets meltdown, I've heard and read (even here) a few people try to pin our problems on the federal Community Reinvestment Act requirements that lending institutions invest in the health, renewal and redevelopment of the communities in which they do business and garner profits.

This claim is absurd.

On Tuesday, I was involved in a national conference call with a very large national bank's community development advisory board. During our conversation, I asked the bankers in charge if blaming the CRA obligations made any sense at all.

Of course, the banks would just as soon these requirements go away since that would mean more profits for their companies. And, you'll recall that Senator Phil Gramm (R-TX) tried to repeal allCRA requirements a few years back. You'll also recall that he's the economic advisor who recently characterized the concern ordinary Americans expressed about the state of our economy as "a nation of whiners" caught up in a "mental recession."

But, back to my phone conference.

The banker I asked summed things up this way, "As far as CRA requirements and the current crisis in the financial markets, anyone who claims that our problems are the result of the CRA rules just doesn't understand the crisis or the way those requirements are worked out in a community. Further, these rules have been around for decades (enacted in 1977) and they just aren't the problem."

I followed up by asking where I might find hard data on the percentage of earnings required for reinvestment in a communities under the rules. I also asked where I might find the actual amounts spent to fulfill the regulations and to what sorts of projects they were directed.

I know from experience here in Dallas, that for most banks the numbers are not huge, nor are the outcomes overwhelmingly impressive in terms of community impact.

Blaming already grossly underfunded programs designed to extend a helping, equitable, non-biased, lifting hand to the poor simply doesn't line up with reality on the ground out here in the neighborhoods.

22 comments:

Yes, is not DIRECTLY responsible for all the losses but it sets a tone and is indicitive of a mindset. The larries learned to direct the banks through CRA, Fannie Mae, Freddie Mac, threats of lawsuits, and howls of discrimination into making billions in bad loans and leaving the taxpayer on the hook.

Whether you put your hand in your jacket and ask a teller for money, or use the CRA and ask the bank president, the gun is implied in both cases and the result is theft.

Given that we have at least one banker on record saying it's not the CRA, are there any actual bank executives (or at least managers) who claim it hurts them in any way? Right now, it seems like the only people blaming the CRA are those who usually give the straight Republican party line. I'd be as suspicious of anything only coming from similar Democrats, but stick to this issue for now.

After getting the stupid youtube anti-CRA propaganda link in an e-mail (sorry, but splices of websites in or out of context does not = credible source to me, particularly when it's a viral video to boot) I did a lot of research on this. I love the following links and what they had to say:

Sorry Anonymous 1:50, I don't mean to blame all Republicans (I like most of you), just people who swallow whatever rhetoric flows out of any party they mindlessly follow. I hope chand isn't in that group on this issue.

Larry wrote: "Of course, the banks would just as soon these requirements go away since that would mean more profits for their companies." Yes, CRA was just another cost of doing business, the same way a Mom & Pop corner store might pay protection money to the neigborhood thugs. If Vinnie and Gus don't take too much, the corner store can probably stay in business and keep making payments. Yes, the banks could probably afford CRA if it stopped there.

Of course Larry would only mention the 1977 CRA Original Act. Take a look at this, research it, know all the additions and changes made since 1989 to this Act, then make your decision. Some Congress members ignored the warnings on this, and fought against more regulation for Fannie and Freddie back in the early 90s. Is there such a thing anymore as "heart in the right place, absolutely no brain behind it?" http://en.wikipedia.org/wiki/Community_Reinvestment_Act

Good information. Still waiting on someone working in a bank, someone affected by this crisis, someone even looking for a scapegoat but from the inside, to cite this as any level of problem. It's amazing how many answers you can give to a question that don't actually answer it - this is good practice for watching the debates.

btw looks like it was nicely hamstrung in 2005. Once again, if the act were considered a problem, I assume the administration would be taking credit for fighting against it in this manner.

Barack Obama wants to tell a tale about turbulence in the financial markets, and like any good melodrama this story needs a villain. Sen. Obama believes he has found his mustache-twirling Snidely Whiplash in the person of Phil Gramm, the candid-to-a-fault former senator from Texas who presided over a major reform of American banking laws a decade ago. Obama here displays a signal failure to understand the convulsions in the markets. And he also fails to identify the guilty parties — which is odd, since some of them used to sign his paycheck back in his community-organizing days and others are among his most important political donors.The Gramm-Leach-Bliley Act of 1999 passed the Senate with 90 votes (8 against, 1 absence: John McCain, who supported the legislation) and was signed into law by Bill Clinton. It had little to do with the issues at play in the current crisis: lending standards and the amount of debt banks can take on relative to their equity. The upshot of the Gramm legislation is that it allows financial services companies to diversify their lines of business: Commercial banks can engage in investment banking, banks can offer brokerage services, and you can have an IRA at the same place you have your checking account.

What we have here is a case of what economist Paul H. Rubin calls “folk economics” — value-laden myths that do not reflect financial realities.

It is not at all clear what, if anything, Gramm’s legislation has to do with the current difficulties in the market, other than the fact that Democrats instinctively recoil when they hear the word “deregulation.”

Gramm-Leach-Bliley did not create securitization and collateralized debt obligations. It did not change the rules for banks’ leverage ratios. If anything, Gramm-Leach-Bliley mitigated some risks by allowing financial companies to diversify their businesses, and it is the most diversified firms that are best weathering the storm. Which makes sense: An investment portfolio is more stable the more diversified it is. The firms that have spectacularly imploded have mostly been non-diversified commercial banks, like Countrywide, or pure investment banks, like Lehman Brothers. But the broadly diversified megabanks are enduring — taking a hit from housing, sure, but they have other lines of business to sustain them. And we should not forget: Without the Gramm-Leach-Bliley reforms, Bank of America would have been legally forbidden to take over Merrill Lynch — very possibly leaving taxpayers on the hook for that one, too. Morgan would not have been able to buy Bear Stearns without Gramm’s reforms.

Much more problematic than Gramm-Leach-Bliley is the Community Reinvestment Act, a bit of legislative arm-twisting much beloved by Sen. Obama and his fellow Democrats. One of the reasons so many bad mortgage loans were made in the first place is that Barack Obama’s celebrated community organizers make their careers out of forcing banks to do so. ACORN, for which Obama worked, is one of many left-wing organizations that spent decades pressuring banks and bank regulators to do more to make mortgages available to people without much in the way of income, assets, or credit. These campaigns often were couched in racially inflammatory terms. The result was the Community Reinvestment Act. The CRA empowers the FDIC and other banking regulators to punish those banks which do not lend to the poor and minorities at the level that Obama’s fellow community organizers would like. Among other things, mergers and acquisitions can be blocked if CRA inquisitors are not satisfied that their demands — which are political demands — have been met. There is a name for loans made to people who do not have the credit, assets, income, or down payment to qualify for a normal mortgage: subprime.

The bankers cannot blame CRA entirely; they made a lot of bad bets on rising home prices. But CRA did influence lending standards across the banking industry, even in those institutions that are not strictly liable to its jurisdiction. The subprime debacle is in no trivial part the result of lending decisions in which political extortion trumped businesses’ normal bottom-line concerns.

Along with these bad loans, the underlying problem is that there was a bubble in the price of housing — a bubble caused in no small part by politics, in the form of an easy-money/easy-credit policy from the Fed.

It was politics, too, that created Fannie Mae and Freddie Mac, enabled them to dominate the mortgage market, and implicitly took upon American taxpayers the risks of those business while the rewards were enjoyed, to the tune of hundreds of millions of dollars, by largely Democratic political opportunists, who then gave generously to Democrats, the top recipients of their largesse being: Chris Dodd, Hillary Rodham Clinton, John Kerry, and Barack Obama. And it was politics that unwisely nationalized Fannie and Freddie without resolving the underlying moral hazard — private profit, public risk — that makes those institutions problematic. From this Senator Obama takes away the lesson that there has been a failure of the market, and that what is needed is more politics. In this analysis Obama is as wrong as it is possible to be.

The only reason there are returns on investments is that there is risk involved. Obama talks as though the government can create new regulations that will remove risk from the markets. It cannot. Investors sometimes make bad decisions. Businesses sometimes borrow too much money. “Some of these investment banks look like hedge funds, they’re so leveraged,” says one longtime Wall Street hand. But the markets are addressing that problem, too, in their own brutally Darwinian way: That’s why Bank of America is acquiring Merrill Lynch on the cheap.

Phil Gramm is a fine foil for Obama: a conservative Texan with a furry accent and an unsympathetic demeanor. He’s the perfect symbol — and Obama’s campaign is rooted in nothing but symbolism. The reality is the thousands of dollars in donations from Fannie Mae executives sitting in Obama’s campaign coffers. If Obama wants a villain, he doesn’t have far to look.

Article by Thomas J. DiLorenzo "Liberal" economists are overjoyed by the bursting of the housing bubble, for it provides them with what they believe is another "market failure" story. "Most analysts see the sub-prime crisis as a market failure," Robert Gordon gleefully declared in the April 7 online edition of The American Prospect magazine, edited by Robert Kuttner.Gordon does not define what an "analyst" is, and does not cite any survey to support his claim. One suspects that his opinion is based on an informal survey of his like-minded, left-wing friends.Gordon is a defender of the federal government's 1977 Community Reinvestment Act (CRA) under which the Fed and other financial regulators have pressured/extorted banks into making more loans to less-than-creditworthy borrowers than they would normally be willing to risk. As such, Gordon believes in the following propositions:1. runaway greed ("market failure") on the part of lenders is the cause of the subprime crisis;2. these same greedy lenders routinely ignore billions of dollars in potential profits in lower-income communities because of their systemic racism, stupidity, or both — hence the need for the CRA; and3. no government agency, especially not the Fed, had anything to do with either the creation or bursting of the housing market bubble and the subprime crisis.(If you think I'm establishing a straw-man argument, read Gordon's article for yourself.)The first two propositions flatly contradict each other, whereas the third is unequivocally false. Fed policy — which is not even mentioned by Gordon in an article that is ostensibly about the cause of the subprime crisis — is the cause of the boom-and-bust cycle that has caused the housing bubble and its bursting. Not "market failure" but Fed policy.Gordon is incensed that a few "analysts," including myself and Professor Stan Liebowitz of the University of Dallas, have argued that the bursting of the housing bubble has caused the chickens to come home to roost, so to speak, after thirty years of government policy pressuring banks to make tens of billions of dollars in bad loans to people with low (or nonexistent) credit ratings. Neither Liebowitz nor I have argued that every last bad loan out there is a CRA loan, but Gordon implies that we do in a rather feeble attempt to construct a straw-man argument.Gordon cites Fed bureaucrat Janet Yellen as the source of a "killer statistic" that absolves the government of all guilt: "Independent mortgage companies" which are not covered by the CRA made many more "high-priced loans" to borrowers with bad credit than did CRA-regulated banks, she says. Well, so what? Even if Yellen is correct, that does not mean that CRA-regulated loans have not caused tens of billions of dollars in defaults. Moreover, Yellen and Gordon don't seem to understand what an "independent mortgage company" is. Many of these companies are like the one in which my next-door neighbor is employed: they are middlemen who arrange mortgage loans for borrowers — including "subprime" borrowers — with banks, including CRA-regulated banks. Some killer statistic.By ignoring the role of the Fed in creating the whole housing-market mess, Gordon's pronouncement that it is entirely a result of "market failure" is laughable on its face. He also flatly denies that CRA lending has had anything to do with why so many uncreditworthy borrowers have defaulted now that the Fed-generated housing bubble has burst. This, too, is an untenable position.When the CRA was created during the Carter administration, the administration also funded with tax dollars numerous "community groups" that have helped the Fed, the Comptroller of the Currency, and other federal regulatory agencies to enforce the act. Under the CRA, if a bank wants to make virtually any change in its business operations — merging, opening up a new branch, getting into a new line of business — it must first prove to regulators that it has made "enough" loans to the government's preferred borrowers. The (partially) tax-funded "community groups" like ACORN (Association of Community Organizations for Reform Now) can file petitions with regulators that stop the bank's activities in their tracks, perhaps defeating them altogether. The banks routinely buy off ACORN and other "community groups" by giving them millions of dollars as well as promising to make even more dubious loans.In order to try to diversify the risk of these loans, the Federal Home Loan Mortgage Company ("Freddie Mac") pioneered the "securitization" of bundles of these high-risk loans so that they could be sold on secondary markets. Such "securitization" exploded during the 1990s as a result of government regulation. As Fed Chairman Ben Bernanke himself stated in a March 30, 2007 speech entitled "The Community Reinvestment Act: Its Evolution and New Challenges" (published online by the Fed), Securitization of affordable housing loans expanded, as did the secondary market for these loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a large percentage of their activities to meeting affordable housing goals. (p. 3)In 1994 the Riegle-Neal Interstate Banking and Branching Efficiency Act loosened up the regulatory barriers to bank mergers. Consequently, said Bernanke, "As public scrutiny of bank merger and acquisition activity escalated, advocacy groups [like ACORN] increasingly used the public comment process to protest bank applications on CRA grounds." In other words, there was a burst of additional legalized extortion perpetrated by the Fed and its pet "activist organizations" beginning in the mid-1990s. As a result, says Bernanke, "banks began to devote more resources to their CRA programs." What an understatement.Also in 1995, the US Treasury Department created the multibillion-dollar "Community Development Financial Institutions" fund to "provide banks with access [i.e., taxpayers' dollars] to new opportunities to finance community economic development" as "encouraged" by the CRA, said the Fed chairman.The government also "streamlined" the regulatory requirements for CRA loans in 1995, allowing — and indeed pressuring — banks to make such loans without the benefit of many traditional credit-worthiness criteria, such as the size of the mortgage payment relative to income, savings history, and even income verification! Instead, the Fed told banks that participation in a credit-counseling program, many of which are federally funded, could be used as "proof" of a low-income applicant's ability to make his mortgage payments. In other words, federal bank regulators required banks to make bad loans based on nonexistent credit standards.In his April 26 New York Post article on the CRA entitled "The Real Scandal," Professor Liebowitz explains how the government's Fannie Mae Foundation singled out one bank in particular as the role model for all other banks in America in terms of its commitment to CRA lending: Countrywide, the nation's largest mortgage lender, had committed to $600 billion in low-income or "subprime" loans as of 2003. Today, Countrywide is essentially bankrupted and has been merged with Bank of America.The myth that the CRA would not be harmful to bank-industry profits was hidden for years by the Fed-created housing bubble, which allowed for easy refinancing of all the bad debt. "[The] CRA increased lending and homeownership in poor communities without undermining banks' profitability," Robert Gordon proudly proclaims. But now that the bubble has burst, all those unqualified borrowers — whom the government calls "subprime," as though their credit ratings are only a tiny, tiny smidgen below "prime" borrowers with the very best credit ratings — are defaulting on their mortgages in droves. Bank profitability has been extremely "undermined," to put it mildly. The bursting of the Fed-generated housing bubble is the reason why the CRA scam was not exposed until now, despite having been in operation for some thirty years.Thomas DiLorenzo is professor of economics at Loyola College

If quantity matters, I guess that's 2 impressive articles, including one from a self-titled Villain! Still waiting to hear a banker claim that the CRA had anything to do with today's problems.

And Gramm's 1999 bill combined banks so that those who evaluate companies and those who make a profit on them were on the same balance sheet - if you don't think that contributed to companies' extending risk and leverage to this point, you must believe we're all saints.

I stand by my original comments. Yesterday, I spent about 3 hours with the President of the local market expression of a major American bank. He agreed with my comments here in terms of the current crisis. CRA was designed to respond to redlining loans and racial discrimination in lending and community development. I'm always amazed by the aversion to the work of poor communities to work together to get what they need. I haven't had any direct experience with ACORN, but I do know they care about the same individuals and communities that I care about.

Again, CRA didn't get us where we are today. Poor people aren't to blame, nor are poor communities. Greed in the marketplace did. And, by the way, the banker I spoke with yesterday agreed and I can assure you he is no "liberal."

Yes, greed is bad. Who supports greed? Lets all give a big rasberry to GREED. But greed is an intangible human failing. It's like blaming 9/11 on the sin in the world. Why did 9/11 happen? Because there is sin in the world? Well, yes, but more specifically because 19 hijackers flew planes into buildings.

Who is not motivated by greed? The borrower looking for house he can't afford? The banker making a loan and shifting the risk elsewhere? Politicians looking to buy votes and support on the backs of taxpayers?

We could blame apples and oranges, too, chand, with the same evidence you've given us. You're the one pointing fingers at your favorite liberal programs. Nice shift to victim, though - someday I still hope you'll find some intellectual or moral integrity to actually say something defensible.

chand, I just want to be clear that low-income folks who are the focus of CRA regs, did not wreck this economy. You've got to move up the income/wealth food chain a lot higher to find those who made bad, bad decisions that realized a short-term, self-serving benefit to the peril of us all. CRA was designed to counter loan red-lining based on race. CRA has been a tool that directs economic advantage to distressed community for the good of the whole. I have a feeling that some of my far right readers here actually argue consistently against their own self-interests.

Who is responsible? Are you talking about Franklin Raines? Angelo Mozilo at Countrywide? Or is it just thosed opposed to a Gov directed financial system? CRA lives of the storyline that those racist jew bankers won't loan to black people. Because CRA was designed to make those racist SOBs make loans to the angles of the inner city, its power could never be abused by the self appointed saints.

It is unfortunate that racist bigots refuse to see the truth when it is put right in front of them. People like c hand are so ignorant it would not matter what the circumstances are. They are unable to get past their biased feelings or thoughts to even begin seeing the real truth of anything once their mind is made up. They are blocked mentally. How sad and not the kind of person I even want to spend 1/2 second having any kind of intellectual conversation with.

Larry James' Urban Daily

A repository of ideas, resources, commentary and opinions concerning the issues facing low-income residents of the inner cities of the United States and how mainstream America largely forgets or, worse, ignores the day-to-day realities of urban life for the so-called "poor." Written and edited by the President & CEO of CitySquare. Please visit CitySquare.